Cryptocurrency may be a relatively recent technological advancement, but it might be here to stay for a long given its popularity. Chances are, you know someone who has tried to invest in it.
But when you decide to follow the same path, you’ll want to know what cryptocurrency’s value is so you can judge whether your decision is a good or bad one. Cryptocurrency valuation isn’t a piece of cake though. So to help you out, here’s a beginner’s guide to valuing cryptocurrency that you might want to read.
What Makes Cryptocurrency Valuation Difficult?
Unlike some other investment opportunities, there’s no exact science in determining the value of cryptocurrency. Why is that so?
- The sheer number of cryptocurrencies make valuation extremely difficult — if not impossible.
There are more than 2,400 cryptocurrencies in circulation right now. So no, cryptocurrency and Bitcoin are n’t interchangeable at all. Bitcoin is only one of several cryptocurrencies despite its loose usage in the popular lexicon.
That said, each of those thousands of cryptocurrencies has a different value that ranges from a fraction of a dollar to thousands of US dollars. Bitcoin falls under the latter scenario given its status as the first established cryptocurrency.
Take note though that each cryptocurrency’s declared value changes every second. Blink, and you’ll miss it — which makes determining cryptocurrency valuation somewhat challenging.
- The decentralized nature of cryptocurrency means no one is directly influencing its value.
An enduring appeal of cryptocurrency is there isn’t any central authority overseeing its production. Because of this, fears that it may displace real-world currencies anytime soon have caused certain financial institutions and even entire governments to ban it altogether. Until those fears become dissolved, it’s hard to say whether a specific cryptocurrency would go up or down in value. Besides, even if your government has banned the cryptocurrency you ’ve invested in, it might go up in value instead of the expected downward slide — despite you and your fellow investors having to go underground as a result.
- The use of cryptocurrency outside of the digital realm isn’t that prevalent despite its popularity.
Cryptocurrency may have already entered the public sphere of consciousness, but talking about it is very much different from gaining first-hand experience in using and investing in it.
Also, several brick-and-mortar stores and other physical establishments all over the world have yet to accept cryptocurrency as a valid payment method since the risk of losing profit is too high to do so.
As a result, not everyone knows every cryptocurrency in circulation — with some of them already on their way out before people even get the chance to know their respective values.
What Are Some of the Factors That Affect Cryptocurrency’s Value?
Unlike most forms of investment where the value over a fixed period is usually predictable, cryptocurrency can jump up or down by as much as several times in a single day. You may have invested in a specific cryptocurrency upon seeing that its value might guarantee you a massive return of investment only to find out after taking a short nap that it has already tanked.
To minimize the possibility of incurring any financial losses from the very minute you start investing in a cryptocurrency, you’ll want to look into some of the factors that affect its value as follows:
- Scarcity
When Bitcoin first got its start, its developer ensured that its maximum supply wouldn’t be infinite to drive demand for it. If you can still recall your Economics lessons from college, the law of supply and demand states in part that the lower the supply of a specific item is and the higher the demand for it is, the higher its value will be.
Thus, every cryptocurrency in circulation has a fixed maximum supply to keep the bar for entry high enough that only those with enough money to spend can exchange their real-world currency for its virtual cousin. That’s why you should sort out your finances first before investing in cryptocurrency, and keep a rainy day fund as well in case your time as an investor in a specific cryptocurrency doesn’t turn out well.
- Popularity
Out of the thousands of cryptocurrencies currently in circulation, only a handful of names such as Bitcoin, Ethereum, Ripple, and Dogecoin — to name a few — have received enough media mileage that even those who don’t use them at all are already familiar with them somehow. It only follows that popular cryptocurrencies like the ones mentioned are valued highly while the more obscure ones have a lesser value.
- Energy used by cryptocurrency mining
Production of cryptocurrency occurs by way of mining. Without going further into how it’s done, other than to mention that mining involves intensive cracking of codes encrypting every record in a blockchain, rigs used to produce cryptocurrency consume so much computing power and electricity. The more difficult it is to mine cryptocurrency, the higher its value can get.
How to Find the Approximate Value of Cryptocurrency
The value of a specific cryptocurrency that you’ve invested in can change without any prior warning and usually in the space of several times in a day. However, you can still at least try to determine an approximation of its value that can help you decide whether investing in it is a good move or not. Here are some ways to find the approximate value of cryptocurrency:
- Check the cryptocurrency’s pricing history.
While a bit difficult to pull off given its extreme volatility, you can determine the value of a specific cryptocurrency by checking its pricing history. If a cryptocurrency’s current value isn’t that far removed from its value as of, say an hour ago, you can safely conclude that its overall value is good enough that you can invest in it safely. But if a cryptocurrency’s value wildly fluctuates over a short span of time, its market price may turn out to be low since people are generally averse to uncertainty.
- Find out how many active users perform their transactions each day using your chosen cryptocurrency.
The number of people using a cryptocurrency to pay for goods and services online, or in physical spaces where it’s accepted as a payment method, directly influences its value. If the cryptocurrency you plan to invest in is used by a massive number of active users each day, chances are its market price is high. But if only very few people use a specific cryptocurrency on a daily basis, its value may turn out to be very low.
- Discover how the development team addresses any issues related to the cryptocurrency that arise from time to time.
Cryptocurrency is a continuously evolving technological advancement with issues popping up from time to time. How they get resolved by the developers behind a specific cryptocurrency has a significant influence in its perceived value. If a cryptocurrency’s developers take too long to fix a particular issue surrounding it, you should expect its value to take a dip mostly because of frustrated users. Otherwise, a cryptocurrency’s value may go up as the speedy resolution of issues related to it keeps its users wanting to use it.
Conclusion
The market for cryptocurrency is still new and thus very volatile. Proof of it is that in March 2018, cryptocurrency’s value slid downwards of up to more than 60 billion US dollars. Despite that setback, cryptocurrency has since climbed out of the pit and is making a good recovery. That’s why, if you have the guts to try something that can reap huge rewards, as long as you know your way around it, you should start investing in cryptocurrency. But whichever specific one you plan to invest in, you should know first how to properly value it with the help of this beginner’s guide to cryptocurrency valuation so that you won’t end up losing too much of your investment.
